Why This Harvard Economist Is Pulling All His Money From Bank Of America

A classicial economist... and Harvard professor... preaching to the world that one's money is not safe in the US banking system due to Ben Bernanke's actions? And putting his withdrawal slip where his mouth is and pulling $1 million out of Bank America? Say it isn't so...

Is your money safe at the bank? An economist says ‘no’ and withdraws his

Last week I had over $1,000,000 in a checking account at Bank of America. Next week, I will have $10,000.

Why am I getting in line to take my money out of Bank of America? Because of Ben Bernanke and Janet Yellen, who officially begins her term as chairwoman on Feb. 1.

Before I explain, let me disclose that I have been a stopped clock of criticism of the Federal Reserve for half a decade. That’s because I believe that when the Fed intervenes in markets, it has two effects — both negative. First, it decreases overall wealth by distorting markets and causing bad investment decisions. Second, the members of the Fed become reverse Robin Hoods as they take from the poor (and unsophisticated) investors and give to the rich (and politically connected). These effects have been noticed; a Gallup poll taken in the last few days reports that only the richest Americans support the Fed. (See the table.)

Why do I risk starting a run on Bank of America by withdrawing my money and presuming that many fellow depositors will read this and rush to withdraw too? Because they pay me zero interest. Thus, even an infinitesimal chance Bank of America will not repay me in full, whenever I ask, switches the cost-benefit conclusion from stay to flee.

Let me explain: Currently, I receive zero dollars in interest on my $1,000,000. The reason I had the money in Bank of America was to keep it safe. However, the potential cost to keeping my money in Bank of America is that the bank may be unwilling or unable to return my money.

They will not be able to return my money if:

Many other depositors like you get in line before me. Banks today promise everyone that they can have their money back instantaneously, but the bank does not actually have enough money to pay everyone at once because they have lent most of it out to other people — 90 percent or more. Thus, banks are always at risk for runs where the depositors at the front of the line get their money back, but the depositors at the back of the line do not. Consider this image from a fully insured U.S. bank, IndyMac in California, just five years ago.

Some of the investments of Bank of America go bust. Because Bank of America has loaned out the vast majority of depositors’ money, if even a small percentage of its loans go bust, the firm is at risk for bankruptcy. Leverage, combined with some bad investments, caused the failure of Lehman Brothers in 2008 and would have caused the failure of Bank of America, AIG, Goldman Sachs, Morgan Stanley, Merrill Lynch, Bear Stearns, and many more institutions in 2008 had the government not bailed them out.

In recent days, the chances for trouble at Bank of America have become more salient because of woes in the emerging markets, particularly Argentina, Turkey, Russia and China. The emerging market fears caused the Dow Jones Industrial Average to lose more than 500 points over the last week.

Returning to my money now entrusted to Bank of America, market turmoil reminded me that this particular trustee is simply not safe. Or not safe enough, given the fact that safety is the reason I put the money there at all. The market turmoil could threaten “BofA” with bankruptcy today as it did in 2008, and as banks have experienced again and again over time.

If the chance that Bank of America will not return my money is, say, a mere 1 percent, then the expected cost to me is 1 percent of my million, or $10,000. That far exceeds the interest I receive, which, I hardly need remind depositors out there, is a cool $0. Even a 0.1 percent chance of loss has an expected cost to me of $1,000. Bank of America pays me the zero interest rate because the Federal Reserve has set interest rates to zero. Thus my incentive to leave at the first whiff of instability.

Surely, you say, the federal government is going to keep its promises, at least on insured deposits. Yes, the Federal Government (via the FDIC) insures deposits in most institutions up to $250,000. But there is a problem with this insurance. The FDIC currently has far less money in its fund than it has insured deposits: as of Sept. 1, about $41 billion in reserve against $6 trillion in insured deposits. (There are over $9 trillion on deposit at U.S. banks, by the way, so more than $3 trillion in deposits is completely uninsured.)

It’s true, of course, that when the FDIC fund risks running dry, as it did in 2009, it can go back to other parts of the federal government for help. I expect those other parts will make the utmost efforts to oblige. But consider the possibility that they may be in crisis at the very same time, for the very same reasons, or that it might take some time to get approval. Remember that Congress voted against the TARP bailout in 2008 before it relented and finally voted for the bailout.

Thus, even insured depositors risk loss and/or delay in recovering their funds. In most time periods, these risks are balanced against the reward of getting interest. Not so long ago, Bank of America would have paid me $1,000 a week in interest on my million dollars. If I were getting $1,000 a week, I might bear the risks of delay and default. However, today I am receiving $0.

So my cash is leaving Bank of America.

But if Bank of America is not safe, you must be wondering, where can you and I put our money? No path is without risk, but here are a few options.

Keep some cash at home, though admittedly this runs the risk of loss or setting yourself up as a target for criminals.

Put some cash in a safety box. There is an urban myth that this is illegal; my understanding is that cash in a safety box is legal. However, I can imagine scenarios where capital controls are placed on safety deposit box withdrawals. And suppose the bank is shut down and you can’t get to the box?

Pay your debts. You don’t need to be Suze Orman to know that you need liquidity, so do not use all your cash to pay debts. However, you can use some surplus, should you have any.

Prepay your taxes and some other obligations. Subject to the same caveat about liquidity, pay ahead. Make sure you only pay safe entities. Your local government is not going away, even in a depression, so, for example, you can prepay property taxes. (I would check with a tax accountant on the implications, however.)

Find a safer bank. Some local, smaller banks are much safer than the “too-big-to-fail banks.” After its mistake of letting Lehman fail, the government has learned that it must try to save giant institutions. However, the government may not be able to save all failing institutions immediately and simultaneously in a crisis. Thus, depositors in big banks face delays and defaults in the event of a true crisis. (It is important to find the right small bank; I believe all big banks are fragile, while some small banks are robust.)

Someone should start a bank (or maybe someone has) that charges (rather than pays) interest and does not make loans. Such a bank would be a good example of how Fed actions create unintended outcomes that defeat their goals. The Fed wants to stimulate lending, but an anti-lending bank could be quite successful. I would be a customer.

(Interestingly, there was a famous anti-lending bank and it was also a “BofA” — the Bank of Amsterdam, founded in 1609. The Dutch BofA charged customers for safe-keeping, did not make loans and did not allow depositors to get their money out immediately. Adam Smith discusses this BofA favorably in his “Wealth of Nations,” published in 1776. Unfortunately — and unbeknownst to Smith — the Bank of Amsterdam had starting secretly making risky loans to ventures in the East Indies and other areas, just like any other bank. When these risky ventures failed, so did the BofA.)

My point is that the Federal Reserve’s actions have myriad, unanticipated, negative consequences. Over the last week, we saw the impact on the emerging markets. The Fed had created $3 trillion of new money in the last five-plus years — three times more than in its entire prior history. A big chunk of that $3 trillion found its way, via private investors and institutions, into risky, emerging markets.

Now that the Fed is reducing (“tapering”) its new money creation (now down to $65 billion a month, or $780 billion a year, as of Wednesday’s announcement), investments are flowing out of risky areas. Some of these countries are facing absolute crises, with Argentina’s currency plummeting by more than 20 percent in under one month. That means investments in Argentina are worth 20 percent less in dollar terms than they were a month ago, even if they held their price in Pesos.

The Fed did not plan to impoverish investors by inducing them to buy overpriced Argentinian investments, of course, but that is one of the costly consequences of its actions. If you lost money in emerging markets over the last week, at one level, it is your responsibility. However, it is not crazy for you to blame the Fed for creating volatile prices that made investing more difficult.

Similarly, if you bought gold at the peak of almost $2,000 per ounce, you have lost one-third of your money; you share the blame for your golden losses with Alan Greenspan, Ben Bernanke and Janet Yellen. They removed the opportunities for safe investments and forced those with liquid assets to scramble for what safety they thought they could find. Furthermore, the uncertainty caused by the Fed has caused many assets to swing wildly in value, creating winners and losers.

The Fed played a role in the recent emerging markets turmoil. Next week, they will cause another crisis somewhere else. Eventually, the absurd effort to create wealth through monetary policy will unravel in the U.S. as it has every other time it has been tried from Weimar Germany to Robert Mugabe’s Zimbabwe.

Ever since Alan Greenspan intervened to save the stock market on Oct. 20, 1987, the Fed has sought to cushion every financial blow by adding liquidity. The trouble with trying to make the world safe for stupidity is that it creates fragility.

Bank of America and other big banks are fragile — and vulnerable to bank runs — because the Fed has set interest rates to zero. If a run gathers momentum, the government will take steps to stem it. But I am convinced they have limited ammunition and unlimited problems.

What is the solution? For you, save yourself and your family. For the system, revamp the Federal Reserve. The simplest first step would be to end the dual mandate of price stability and full employment. Price stability is enough. I favor rules over intervention. We don’t need a maestro conducting monetary policy; we need a system that promotes stability and allows people (not printing presses) to make us richer.

He is almost there. He mentions removing their dual mandate, whereas I would remove the fed itself from existence, which would put a decisive end to this 'dual mandate', which might as well be 'ass rape' then 'pick pocket'

I am sure that the guy has more than a million. Instead of keeping it in the bank, I would short the top 5 high flying stocks with no real earnings @ 200k each (you know which ones) and take two year sabbatical arround the world and when the SHTF wake up a multi millionaire.

You might be missing the point in an effort to prove yourself smarter than the average bear.

He is getting out.

And some of the things he says here ring very true.

How he managed his wealth previously is not known exactly, and it really isn't the point of the article. Either way, I don't need to point out one possibility of his previously foolish behavior to earn points amongst an online community. I enjoyed what he had to say. Did you disagree with the positions in the article, or just his former wealth management techniques (which you might be making assumptions about)?

He's trying to protect his dollars against a scenario where major US backed banks would be unable to deliver and where the FDIC (government) cannot pay its insurance...and still thinks keeping it in dollars is a good idea.

In that scenario, he'll have a bunch of toilet paper with presidents pictures on it. But hey, it will be in his mattress rather than a banksters!

When the SHTF happens it is not going to be a sudden transition to an end state. It is going to be a process. Yes, gold will be the last asset standing but before the US Dollar becomes worthless it is going to have massive purchasing power. Just before the end physical dollars that have that property, not the digital dollars in the banks. This is the point he is making. Because of generations of conditioning physical dollars will buy you food and gas but credit cards will not be accepted and neither will gold be accepted by the super markets and the gas stations. Anyone holding gold without a buffer of cold hard cash is going to be stripped of their gold. Man, that would hurt.

Read between the lines. He has lost big on EM investements and down. 30% in dollar terms over the past year In Gold. In that scenario I would be very concerned for my million also. He is blaming ZIRP for luring him into bad investment . He is right and definitely not alone. The system is very fragile at this time.. Luxury good sales are down and the wealthy are trying to place their wealth into hard assets. Running scared!!!

sometimes the rich don't run because they don't give a fuck.
I got hammered on my pms las year , yet I do not run, i go full retard and buy miners and agq options like never before. do or die, no running mate.

Fractional reserve banking? Is that what you call it? Where are the reserves? That's the problem. Or half of it. The other problem is that should the banker's investments work out, they keep the profits, should they fail to work out, the funds are replaced at taxpayer expense.

Bankers should be held personally liable for the assets of the bank, as in Switzerland, where they don't have these sorts of problems. In addition, there should be a 20% reserve requirement, 5 to 1 leverage, not 55 to 1 as we have seen recently.

The real problem is not fractional reserve banking, because in order to have FRB one must have reserves. 5 to 1 leverage is FRB, 55 to 1 is insanity. 20% reserve requirement, and when the value of their lending book drops so that it can't cover the other 80%, the bankers personally (they could buy private insurance) make up the rest.

To take that even one step further - in the "Old Days" (think before the 1930's) the banks shareholders were also financially liable for bank malfeasance! That would make you think twice about which banks you would invest in, wouldn't it?

Perhaps that comment was merely "playing well with others" in an attempt to avoid the tin foil dunce cap which is foisted upon all who reject fractional reserve banking and government confiscation outright. After all... He remains a Harvard Professor.

I agree with him in principle, but I am gonna take the unpopular role of devils advocate. All he is really saying is that fractional reserve banking has a fragile foundation that lends itself to bank runs. I didn't get any real insight into the current situation. Something tells me this guy is a few stocks short of an index.

Save your money on the AR. Have you looked at what's buying them? The kind of guy (read people) that buys a Harley but is to scared to ride it. They'll be laying around everywhere a few days after suffering starts.

It's never failed me in almost 20 years and there are no moving parts. The blade is actually under 4" and it passes legal muster in places where anti-dagger/dirk laws prevail just as easily as it penetrates thick winter outerwear.

A true, real survivor only needs a picture of a chopstick, pinned to a wall, inside his impregnable, super-secret, hidden, 10 year fully-stocked, fortress-lair with a sexy-bee-atches harem, printed on very sharp paper. ~

We preferred The Patio. And I'm grateful I haven't had to do that "wait in line" crap for my money. I have been seeing Fells Wargo implementing subtle restrictions lately. I'm actually getting ready to close out that account.

"We are hostages to the destructive actions of central banks. Printing money destroys value. The puzzle is not economic, but rather psychological. Why do we allow Central Bankers to make us poorer and endanger us physically?

The answer lies in our non-rational brains. One aspect of our psychology, labeled the Stockholm Syndrome, is the human propensity to develop positive feelings towards captors in a form of traumatic bonding.

Nils Bejerot coined the phrase after a 1973 Stockholm bank robbery where four hostages were held for close to a week. Even after being released, the hostages showed sympathy for the robber, and blamed the police. The most famous U.S. incident is that of Patty Hearst, who joined the organization that kidnapped her and took part in a bank robbery with her abductors.

The phrase “economy supported by central banks” generates more than half a billion Google hits. Can it really be true that printing money is going to make us rich? No.

Printing money can destroy an economy, or its effects can be close to neutral. Destruction occurs when the money printing severely distorts economic decision-making."

Who the fuck is this professor speaking to? Or, is it that his intellect and fiscal prowess has convinced him that my overworked, unionized busdriver on the 1M northbound is on ZH after his shift to read about what to do with his $1,000,000?

I'm not sure I'd admit him into Fight Club. What good will $1M do if we have societal meltdown? If he would just think it through a little bit, if we accept his premise that "they" (i.e. .gov) are out of firepower to stop bank runs, then you must also accept the premise that social conditions will be so bad that .gov will declare martial law and we'll be eating food rations.

Bank Of America Forces Depositors To Backstop Its $53 Trillion Derivative Book To Prevent A Few Clients From Departing The Bank

Seriously, this asshole is just waking up to money printing, zirp, the insolvency of govts, the ponzi nature of fractional banking and the ultimate risk of a bank run. For fucks sake, I'll bet you could pound a rusty nail through his nuts and he'd hardly flinch.

If we knew the full extent of the fraud, dangerous deals and corruption going on there WOULD be bank runs starting tomorrow morning. After this thing crumbles the stories will start to be told and we'll realize, finally, that we were all living through the biggest age of lies and corruption ever seen on the face of the earth.

Even ZH members will stand in shocked amazement that their conspriacy theories (and conspiracy facts) didn't even come close to capturing the full horror of it.

I wouldn't necessarily call him an asshole because he is just now becoming aware of this( although he may well be one for other reasons). Better late than never, because the realization will never occur to most people. We should welcome his newfound awareness and hope he is able to influence others. After all, if this message is reaching all the way to someone of his background, who you would expect to be charging FOARWARD soviet with the rest of his ivory tower colleagues, maybe the message really is spreading.

His suggestion about non lending banks is naive including non-bank private safe deposit boxes which have been raided under the pretext of money laundering and drug money.

TPTB will not license or insure these types of businesses. If these banks are holding cash money they need insurance for fire and theft or disaster, if they hold electronic money they run the same risk as you with regular banks.

If one had this kind of money, should buy the strongest and highest fire-rated safe deposit box and have it in a hidden sprinklered room at ground level.

For most of us with a lot less, two smaller safes one well hidden and the other very well hidden will suffice. The well hidden should have some cash and two 2 gold coins and the very well hidden should have the rest.

You can also buy welding blankets to wrap your cash with 2200 degree rating

So mouthing off like that does not make sense. Starting a bank run is also a crime.

Agreed. While it feels good to say "where the hell where you fx years ago?" It is a bit self righteous. We were not all woken up at the same time, the important thing is the number of us and the degree by which we are awake.

I've made it through eleven years of foster care and nine years of hard jobs---I'm happy and that should be known. But, I also was able to make it to college on scholarship to study ecnomics and mathematics. I took from that institution what I did and I have found more out in the fields of hard labor too. And, so, it upsets me when I see a story such as this from a Harvard professor who will fundamentally miss his point simply because he (what? hasn't listened to enough James Brown or Above the Law?) does not know how to get on the real with people. They'll have a very hard time hearing you...

I agree, I get the strong impression it's phoney. It's not believable; it's actually a little insulting, being directed at people with so little knowledge of what wealthy people do and don't do; as to imply that the audience is a bunch of hosers.

Harvard educated people would know that FDIC covers 250,000 PER depositor and Pay on death beneficiary, so if he had the account in his name and his wife with their two kids as POD beneficiaries, he'd be covered for 1,000,000.00$

Often it's not that ZH or other public spokespersons don't believe there to be fraud, it's just very hard to prove it, and they can't publicly accuse fraud when they can't prove it. Slander / libel.

Since I'm not really a public spokesperson, I can agree with you, there was fraud, there is fraud, and there will be fraud as long as it's more profitable to defraud than to live and work tirelessly, or to live in a more advanced civilization.

Affirmative action; you have to read up on it; it's absolutely staggering; they'll take a completely mentally dysfunctional person and lead them by the hand through the institution; including letting them take tests over again, and etc. atc. It's absolutely sickening.

Miffed: EmBANKments. See the connection? The poor fucker should have consulted a Hollywood stuntman and his broker before attempting such a leap. Hell, even at my advanced age and dimentia I can still roll down a 40' rock-slewn slope while drunk and taking a piss at the same time.

"Similarly, if you bought gold at the peak of almost $2,000 per ounce, you have lost one-third of your money; you share the blame for your golden losses with Alan Greenspan, Ben Bernanke and Janet Yellen."

and if you bought it $300 then who do i blame? still got one foot in their Matrix...

I am having a bigger problem with an economist with $1,000,000 in his checking account. All that wasted money paid to some dart throwing monkey with a fancy slip of paper (degree) to guess. Money could have been better spent investing in projects that return a positive ROI.